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How to Set Product Pricing for Wholesale Distributors? | OIS

How to Set Prices for Wholesale Distributors

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Determining the best B2B wholesale distributor pricing strategy can be difficult, whether you are a new wholesale consumer-packaged-goods (CPG) brand just getting started or an established brand launching a new product line.

Various mathematical formulas are used to calculate a product’s price, margin, markup, markdown, profitability, and sales history. Fortunately, there are only a few things you need to know when pricing products for wholesale.

In this blog post, we’ll review a few of those formulas as well as some steps you can take to develop successful wholesale pricing strategies.

But first, let’s clarify what wholesale pricing is and how it differs from retail pricing.

 

What is Wholesale Pricing and Wholesale Pricing Definition?

Wholesale pricing refers to the prices used in bulk transactions (for large volumes). When someone buys 100 cases of Coca-Cola rather than one or two bottles of coke, they are buying wholesale.

The goal of wholesale pricing is to make a profit by selling consumer goods at a higher price than it costs to manufacture them. For example, if making one product costs you $10 in labor and materials, you could set a wholesale price of $20, giving you a $10 per unit gross profit.

 

What’s the Difference Between Wholesale & Retail Pricing?

When compared to wholesale prices, retail prices are relatively high. This is because retail profit margins must typically be higher to account for expenses and operating costs such as advertising and marketing, rent, staff salaries, utilities, and so on.

Wholesale businesses have lower operating costs than retail businesses because they require less skilled labor, marketing efforts, physical storefront maintenance, and so on. As a result, wholesale pricing is founded on the idea of selling in bulk at a lower markup. Since their expenses are lower, wholesalers can still make a profit with lower prices.

If you sell both retail and wholesale, knowing how to differentiate your wholesale price from your recommended retail price is critical because your wholesale buyers are unlikely to accept your retail pricing model.

To ensure a healthy return on investment (ROI), the general rule of thumb is that your final selling price should be 50% of the retail price. A good pricing strategy, on the other hand, is highly dependent on your business, so there is no one-size-fits-all solution.

 

How is Wholesale Pricing Calculated / How to Calculate a Price for Wholesale Distributors

Let’s take a look at how to calculate wholesale price for your products.

 

1. Do market research

Determine your market segment and where you fit in before you set any product prices. For example, are you a discount brand, a contemporary brand, or a designer brand? This also influences how your target audience perceives you, which in turn influences your pricing.

If your competitive advantage is a lower price point, keep that in mind as you conduct your research. Be aware of your break-even point and use the break-even point formula to determine it. 

Consider these factors when conducting market research if your target customers are more budget-conscious or looking for a high-quality, high-end product.

 

2. Calculate your cost of goods manufactured (COGM)

The basic price-setting formula is that products should sell for more than they cost you. Once you’ve determined how much your competitors are charging for comparable products, you can compare those figures to your production costs.

The COGM of a product can be calculated using the following formula:

Total Material Cost + Total Labor Cost + Additional Costs and Overhead

= Cost of Goods Manufactured

Unless you are directly involved in manufacturing, you will have to purchase products from the people who make them. They have their own prices, and for each order, you must also consider:

  • Shipping fees
  • Administrative and processing costs for receiving products
  • Failure or defective product rates

When you know how much a product costs, you can start thinking about profit margins. They should ideally be comparable to what your competitors are charging. At least, if you’re selling comparable-quality goods.

If you want to attract more customers, you can choose to offer lower prices than your competitors. 

However, this means you’ll have lower profit margins. Higher prices, on the other hand, may not be well received by customers unless you are selling unique products or your quality is significantly higher.

 

3. Analyze retail prices

Prices for wholesale goods do not exist in a vacuum. If you have any doubts about your prices, you can refer to the three datasets listed below:

  • Each product’s basic production costs
  • How much your wholesale competitors charge
  • How much retail stores charge for the same items

Unless you’re missing something, there should be a difference between the two price lists.

Ideally, you should charge wholesale prices that are comparable to the competition. If you choose to go higher, keep in mind that you may be eating into retailer profit margins, making you a less appealing option.

It’s useful to compare wholesale and retail figures in a spreadsheet for future reference. You’ll be able to appreciate the difference in margins between the two types of businesses for your specific niche this way.

If you’re interested in a wholesale to retail price calculator, Orders in Seconds offers a FREE Wholesale Price Calculator to help you figure out wholesale prices.

 

FREE Wholesale Price Calculator

 

2 Types of Formulas to Calculate Wholesale Price

There are numerous wholesale pricing strategies available, but don’t worry—learning them all isn’t necessary if you’re new to selling wholesale. Instead, let’s go over two quick and easy wholesale pricing methods you can use right now.

 

Absorption Pricing Formula

This is the most basic wholesale price formula you can use in your business. It’s referred to as “absorption” pricing because the final figure includes both your production costs and profit margins.

The formula for absorption pricing is as follows:

Wholesale Price = Cost Price + Profit Margin

Are you unsure how to calculate the cost price?

You’ll need to understand your costs of goods sold (COGS) as well as your overhead costs. Here’s a quick refresher:

  1. Calculate your cost of goods sold.
  2. Calculate your overhead costs.
  3. Total the two expenses.
  4. Once you have those two numbers, add them together to get your formula’s total cost price.

 

Absorption pricing method pros:
  • It is simple to use and does not necessitate any training or complicated formulas.
  • Your profits are almost certain. If you can account for all expenses, you should be able to turn a good profit.

 

Absorption pricing method cons:
  • Pricing gaps are common, and no competitor pricing is taken into account.
  • This method does not take into account value perception. You might charge too much, sending potential customers elsewhere.

 

Differentiated Pricing Formula

Differentiated pricing is a wholesale pricing method that calculates demand for a product to optimize return on investment (ROI). Different buyers in different situations pay different prices for the same product in this case.

This pricing method, also known as demand pricing or time-based pricing, is based on the idea that buyer acceptance determines the price in any given market condition.

For example, if you sell swimsuits, you can charge more than the average market price during peak seasons. You’ll notice that the price of swimsuits in retail stores can quickly rise at the start of the summer season, then drop after demand drops.

This also applies to areas where there is less competition and customers typically pay a higher price for products, such as a beach resort or an airport.

Wholesalers can also offer products at a lower price by using differentiated pricing. For example, if you have too much old stock on hand, you can run a last-minute flash sale and still make a profit.

 

Differentiated pricing method pros:
  • This method can provide the best return on investment. It allows you to take advantage of market scenarios in real-time, stay competitive, and gather buyer data.
  • When a product is in high demand, buyers are often willing to pay a premium, which means more profit for you. Differentiated pricing can be used to sell trending products and other items that are hard to find or extremely popular.

 

Differentiated pricing method cons:
  • There is a fine line between profit maximization and overcharging wholesale customers. If you are perceived as opportunistic, or if people believe you are price-gouging them, your brand’s reputation will suffer. 

 

Conclusion

Setting prices for your store is never easy. Wholesale prices should be lower than retail prices on average.

However, before you set a price, you must ensure that all costs have been considered. That means taking into account production, administrative, and handling costs before even considering a wholesale margin profit.

If you use Orders in Seconds for your B2B wholesale distribution business,  you can offer wholesale pricing at the group, category, and brand levels, chain store or single store level, or special prices on discounted products.

If you would like to learn more about a wholesale software solution to automate product pricing for field sales reps or B2B eCommerce, please Orders in Seconds